GBPJPY retreats from weekly high, slides back below mid-166.00s post-UK Retail Sales

• GBPJPY struggles to preserve its modest gains to the weekly high and retreats below mid-166.00s.
• Stronger domestic inflation figures, the cautious mood underpin the safe-haven JPY and cap gains.
• A bleak outlook for the UK economy overshadows upbeat UK Retail Sales and acts as a headwind.

The GBPJPY cross surrenders a major part of its intraday gains to the weekly high and retreats below mid-166.00s during the early European session on Friday.

A combination of factors provides a modest lift to the Japanese Yen, which, in turn, acts as a headwind for the GBPJPY cross. Data released on Friday showed that Japan’s core consumer inflation (excluding volatile fresh food prices) accelerated to the highest level in 40 years and rose 3.6% YoY in October. This, along with the cautious mood, is seen driving some haven flows towards the JPY.

That said, the Bank of Japan's dovish stance keeps a lid on any meaningful upside for the JPY and helps limit the downside for the GBPJPY cross. In fact, BoJ Governor Haruhiko Kuroda reiterated on Friday that the central bank will stick to its monetary easing to support the economy. In contrast, the Bank of England is expected to continue raising rates to combat stubbornly high inflation.

The bets were reaffirmed by Wednesday's release of hotter-than-expected UK consumer inflation figures, which showed that the headline CPI accelerated to a 41-year high in October. Furthermore, BoE Governor Andrew Bailey said on Wednesday that Britain's very tight labour market was a key reason why further interest rate increases were likely.

This, along with mostly upbeat UK monthly Retail Sales figures for October, offer support to the GBPJPY cross. That said, a bleak outlook for the UK economy is holding back bullish traders from placing aggressive bets around the GBPJPY cross. After processing Chancellor of the Exchequer Jeremy Hunt's new figures in the Autumn Statement, the UK Office for Budget Responsibility (OBR) has published new forecasts that predict UK GDP to shrink by 1.4% next year, as opposed to the 1.8% growth in its previous foercast, in March.

The mixed fundamental backdrop warrants caution before positioning for an extension of the recent bounce from the 163.00 mark, or the monthly low touched last Friday. Traders now look to speeches by BoE's external MPC members - Catherine Mann and Jonathan Haskel - for some impetus. Nevertheless, the GBPJPY cross remains on track to register its first weekly gains in the previous three.

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